Axiom Capital’s Gordon Johnson has a new note out Monday, warning that recent data out from China may indicate that it’s time to go bearish on U.S. steel producers.
Johnson writes that investors should now short U.S. Steel (X) and Cliffs Natural Resources (CLF), as well as underweight the US steel sector in their portfolios. He bases this opinion on some domestic factors, including the fact that he expects an indefinite delay any decision on the Section 232 of the Trade Expansion Act of 1962, as well as worsening U.S. auto fundamentals. But one of his biggest concerns about commodities is China’s GDP.
While China’s GDP growth was better than expected, the contribution from commodity-intensive sectors may have peaked, he argues:
Although China’s GDP growth beat Cons. in 2Q, we see a worrying trend emerging for commodity-intensive sectors. To wit, the shr of economic growth from “secondary industries”, which incl. construction & mfg., in nom. GDP had been trending lower ’11-’16, but moved higher in 1H17 due, as we see it, to record credit growth. Yet, with the contribution of secondary industries to nominal GDP growth rising to nearly 1 std. dev above the 10-yr. mean in 2Q17, while noting: (a) this contribution has exceeded 1 std. dev <13% of the time since 3Q07, maxing out at <1.3 std. dev, & (b) China’s full-yr. GDP target implies a slowdown in 2H17 growth, we posit demand for steel/met coal have peaked in ‘17.
The iShares China Large-Cap ETF (FXI) is trading up at recent check.